Islamic Banking and Finance

Islamic banking or Islamic finance (Arabic: مصرفية إسلامية‎) or sharia-compliant finance[1] is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic banking/finance include Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus), and Ijara (leasing).

The Qur’an prohibits riba, which literally means “increase”. Technically riba is the increase when liquid or fungible assets (cash, debt, grains, etc.) are exchanged other than at par value. The most prevalent example in today’s economy is lending money at interest, for example an exchange of $100 cash now for $110 payable in a year’s time, an increase of $10. (Some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam (“restricted, or excluded”).